diff --git a/mercurial/hg.py b/mercurial/hg.py
--- a/mercurial/hg.py
+++ b/mercurial/hg.py
@@ -168,10 +168,14 @@ def clone(ui, source, dest=None, pull=Fa
                 copy = False
 
         if copy:
+            hgdir = os.path.realpath(os.path.join(dest, ".hg"))
             if not os.path.exists(dest):
                 os.mkdir(dest)
+            else:
+                # only clean up directories we create ourselves
+                dir_cleanup.dir_ = hgdir
             try:
-                dest_path = os.path.realpath(os.path.join(dest, ".hg"))
+                dest_path = hgdir
                 os.mkdir(dest_path)
             except OSError, inst:
                 if inst.errno == errno.EEXIST:
diff --git a/tests/test-clone-failure b/tests/test-clone-failure
--- a/tests/test-clone-failure
+++ b/tests/test-clone-failure
@@ -49,4 +49,17 @@ echo stuff > a/a
 hg clone q a
 echo $?
 
+# leave existing directory in place after clone failure
+hg init c
+cd c
+echo c > c
+hg commit -A -m test -d '0 0'
+chmod -rx .hg/store/data
+cd ..
+mkdir d
+hg clone c d 2> err
+echo $?
+test -d d && echo "dir is still here" || echo "dir is gone"
+test -d d/.hg && echo "repo is still here" || echo "repo is gone"
+
 true
diff --git a/tests/test-clone-failure.out b/tests/test-clone-failure.out
--- a/tests/test-clone-failure.out
+++ b/tests/test-clone-failure.out
@@ -12,3 +12,7 @@ destination directory: q
 abort: destination 'q' is not empty
 abort: destination 'a' is not empty
 255
+adding c
+255
+dir is still here
+repo is gone